Generational Dynamics World View

[pbrower2a]

(02-21-2020, 04:27 PM)John J. Xenakis Wrote: ** 21-Feb-2020 World View: Velocity of money

richard5za Wrote:>   John, I was an economics major but that was in 1968 so perhaps I
>   am an economics liability rather than a reliable source of
>   information. However we learned that GDP = Money supply X velocity
>   of money. (No doubt the 2020 version is more sophisticated) So I
>   suspect that the decline in velocity is at least partly due to the
>   monetary authorities pumping more and more money into the
>   system.

That's an interesting analysis.  You're right about the formula,
though there's an extra factor: "Inflation rate X GDP = Money supply X
velocity".  It's the fall in velocity that explains why inflation has
remained low.

With regard to the size of the money supply, we don't live in 1800s,
when the only kind of money was printed money, or even in the 1600s,
when the only kind of money was gold coins and tulip certificates.

In 2008, the Bank of International Settlements said that there are
over $1 quadrillion ($1,000 trillion) worth of credit derivatives and
other structured finance securities in the portfolios of financial
institutions around the world.

Money created through debt is just as real as the money "printed" by
the US government.  If your $50K home increases in value during a real
estate bubble to $500K, and you refinance your home and borrow $400K
against your home, then you can spend that money on cars, groceries,
sex, or whatever you want.  It's the same money.

So the size of the money supply has actually been falling
substantially since 2008, and central banks "printing" money has not
really added to the money supply at all, but instead has replaced the
money in the money supply that disappeared as the bubble collapsed.

The only real point I was making was that a major crisis can change
generational behavior permanently, whether it's a financial crisis or
a coronavirus crisis.

The people getting the money aren't spending it or investing it in plant and equipment. A real-estate bubble? Forget it; too many people have been burned. We are unlikely to see big new (at least in the aggregate) investment in real estate until the Crisis ends. It is easier to profiteer from shortages that result from a gross imbalance of the economy (economic activity concentrated in a few areas). Let's put it this way: the local economy is overheated in Los Angeles and the San Francisco Bay Area, but Fresno is in a depression. New York, Washington, and Boston are fabulously active in their economies, but places like Hartford, Springfield MA, Scranton, and Baltimore are in the dumps. Need I discuss Appalachia and the Rust Belt?  


Velocity of money relates to consumption and investment, and when both collapse, velocity does too. I can excuse WWII because America was not going to supply  private cars, new housing, or expensive consumer goods when it had bigger concerns.  

MV=nPT explains much (M is money, V is velocity, P is price level, and T is the size of an average transaction). Both MV and nRT express GDP. 

We are not going to have a housing bubble; we have been burned. There is much private debt that will not be paid because people lack the means of paying it. Private debt from medical costs to debt for  worthless education to investments that are both unprofitable and unmarketable are themselves bubbles.